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Can you qualify for a mortgage with low credit scores

Posted on November 21, 2014 by Deana Manzanares (NMLS #1286808).

“Can I qualify for a mortgage with a low credit score?”, this is a question I get everyday.  You have a low credit score but want to purchase a home, this is definitely a commonality among many of us.  Your credit history unfortunately whether it is old, unaddressed issues from your past or new unfortunate events such as bankruptcy, foreclosure, collections, etc. is still a reflection of your creditworthiness in the eyes of investors (banks).

It is very discerning when I have to explain to someone that their credit score is not high enough to qualify for a mortgage.  For some they know why their scores are low but for others they were not aware of it and they don’t know how to fix it.  The truth is if your score is lower than 620 it is very difficult to find a investor/lender that will approve you for a mortgage.

Now, you may already have read or seen that FHA guidelines allow for a credit score of 580.  This is true BUT even though FHA allows there are not many investors/lenders that will accept or provide a mortgage. IF you do hear and/or find a lender that will accept the lower credit score all I can say is “beware”!  With many of these lenders there are very stringent requirements, more hurdles for you to go through and could even be higher interest rates, possibly even requesting higher down payments BUT they may not always tell you this upfront.  So again, just beware and make sure to ask questions!

The most common factor I see with scores in the 560-580 range is that there is no established or re-established credit.  Meaning whether you are coming from a foreclosure, bankruptcy or just never opened any credit, you have not established or re-established your credit.  It is a double edged sword, in order to reflect good credit, you have to have good revolving credit.  Many of you think that in having a bad experience in the past with your credit, it is better to stay away from credit cards and just deal in cash, which for some is a better option, but is not the solution if wanting to rebuild or establish good credit.  Unfortunately we have to play the credit game, in order to prove our creditworthiness.  Here are a few main pointers in trying to improve your credit:

  • Ideally you would want to pay your credit card balance off each statement, if unable to this then you will want to pay down your existing debt to 30% of max credit limit or less
  • Don’t close existing accounts once paid off
  • Pay off collections and/or judgments
  • Don’t have any late payments (30+ days)

If you can’t get approved for a credit card you will need to try and get a secured credit card.  This is a great starting point for re-establishing or establishing  credit.  Then keep to the pointers listed above.  Again, you need to use and have credit in order to have a reflection of your creditworthiness! The ideal number is a FICO score of 640, this allows and opens up more opportunities in loan programs, as well as down payment assistance. Please also remember that there are professional assistance options in helping to improve your credit scores.  Don’t be opposed to asking and/or paying for help.  Just do your research on the companies.

Main thing is don’t give up, stay on track, be diligent, be focused and disciplined and before you know it you will be closer to home ownership!

As always, if you have any questions and/or need help on where to start, please don’t hesitate to contact us, we are always happy to help.

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